Reserve ratio and money supply have ________ relationship.  

Key Points

• Reserve ratio and money supply have a negative relationship.
• The reserve ratio is the portion of depositors' balances that banks must have on hand as cash. This is a regulatory requirement set by central banks.
• When the reserve ratio is increased, banks have less money to lend out, which reduces the money supply in the economy.
• Conversely, when the reserve ratio is decreased, banks can lend more money, which increases the money supply.
• This relationship is crucial for central banks when they aim to control inflation and stabilize the economy.

Additional Information

• The reserve ratio is a tool used in monetary policy to regulate the banking system and control the money supply.
• Other tools include open market operations and the discount rate.
• The reserve ratio is part of the broader set of policies known as reserve requirements.
• Changes in the reserve ratio can have significant impacts on the economy, influencing interest rates, borrowing, and spending.
• Central banks, such as the Federal Reserve in the United States or the Reserve Bank of India, adjust the reserve ratio as part of their efforts to maintain economic stability.